4 Overvalued Cloud Stocks To Avoid In June
Image Source: Pexels
COVID-19-pandemic-led restrictions heightened demand for cloud-based services from most industries last year. And the future looks promising for the cloud industry due to continuing advancements in the artificial intelligence (AI) and machine learning (ML) space and rapid deployment of 5G, among other factors. According to Fortune Business Insights, the global cloud computing market is expected to grow at a 17.9% CAGR between 2021- 2028.
However, amid the ongoing economic recovery, investors are rotating away from expensive tech stocks to capitalize on the higher growth potential of cyclical stocks, which is pushing some super expensive cloud stocks out of investors’ portfolios. This is evident in the First Trust Cloud Computing ETF’s (SKYY) 0.1% loss over the past three months versus the SPDR S&P 500 Trust ETF’s (SPY) 9.8% gains.
The sky-high valuations of Zoom Video Communications, Inc. (ZM), Snowflake Inc. (SNOW), Veeva Systems Inc. (VEEV), and Okta, Inc.’s (OKTA), for example, don’t justify their recent financial performance and growth prospects. So, we think these stocks could continue retreating in the near-term.
Zoom Video Communications, Inc. (ZM)
ZM is a popular video-first global communications platform whose solution includes Zoom Meetings that offers HD video, voice chat, and content sharing through mobile devices, desktops, laptops, and conference room systems. It also provides Zoom Rooms, Zoom Conference Room Connector, Zoom Video Webinars, and Zoom Hardware-as-a-Service, among other services.
Law firm Bragar Eagel & Squire is investigating certain officers and directors of ZM following a class action complaint that was filed against it on April 7, 2020. It is alleged that the company made materially false and misleading statements regarding its business, operational, and compliance policies.
For its fiscal first quarter, ended April 30, ZM’s revenue increased 191.4% year-over-year to $956.24 million. However, the company’s operating expenses for the quarter increased 131.2% year-over-year to $464.93 million. And its total liabilities grew 18% year-over-year to $1.69 billion.
In terms of forward P/S, ZM’s 23.46x is 488% higher than the 3.99x industry average. The stock’s 22.90x forward EV/Sales is 442.7% higher than the 4.22x industry average. The stock has declined by 22.9% over the past six months and has been recently trading at around $336.00.
ZM’s poor prospects are apparent in its POWR Ratings as well. It has a D grade for Value and Stability. The POWR Ratings assess stocks by 118 different factors, each with their own weighting. Click here to see the additional POWR ratings for ZM (Momentum, Sentiment, Growth, and Quality). It is ranked #42 of 72 stocks in the Technology – Services industry.
Snowflake Inc. (SNOW)
Formerly known as Snowflake Computing, Inc., SNOW is a cloud data platform provider. Its platform offers Data Cloud, which is an ecosystem that enables consumers to consolidate data into a single source of truth to drive meaningful business insights, build data-driven applications, and share data.
The company partnered with Abacus Insights in February to allow the healthcare industry seamless access to data insights at scale. However, the partnership is still in its initial stages, and it remains to be seen if their collaborative efforts add significant value to the market.
SNOW’s operating loss increased 113.3% year-over-year to $205.59 million for its fiscal first quarter, ended April 30, 2021. Its net loss grew 89.4% year-over-year to $109.23 million, while its operating expenses increased 47.7% year-over-year to $275.56 million. The company’s loss per share increased 76.6% year-over-year to $0.83.
In terms of forward Price/Cash Flow, SNOW’s 1,521.38x is 6,746.9% higher than the 22.22x industry average. Its 63.32x forward P/S is also higher than the 3.99x industry average. The company’s annual revenue is expected to increase 88.2% year-over-year to $1.11 billion in 2022. However, SNOW’s EPS is expected to remain negative in l 2022 and 2023. The stock has lost nearly 30% over the past six months and has been recently trading at around $242.56.
SNOW’s POWR Ratings are consistent with this bleak outlook. The stock has an overall F rating, which equates to Strong Sell in our proprietary rating system. The stock has an F grade for Value and a D grade for Growth, Stability, and Quality. Click here to see SNOW’s ratings for Momentum and Sentiment. SNOW is ranked #71 in the Technology – Services industry.
Veeva Systems Inc. (VEEV)
VEEV provides cloud-based software solutions for the life sciences industry. Its offerings include Veeva Commercial Cloud, which is a suite of software, data, and Veeva Vault, a cloud-based enterprise content and data management application for managing commercial functions.
On April 15, 2 Parexel (PRXL) announced a strategic collaboration with VEEV to accelerate clinical trials through technology and process innovation. However, these are time-intensive processes and it’s still uncertain if the collaboration will prove to be profitable.
VEEV’s revenues from its subscription services segment increased 26.2% year-over-year to $341.12 million for its fiscal first quarter, ended April 30. However, the company’s operating expenses increased 22.2% year-over-year to $188.99 million. Its total liabilities grew 5.8% year-over-year to $3.22 billion.
In terms of forward Price/Cash Flow, VEEV’s 69.79x is 266.5% higher than the 19.04x industry average. In terms of forward Price-to-Book ratio, it’s 15.47x is 258.1% higher than the 4.32x industry average. The stock has rallied only 1.4% over the past nine months and has been trading recently at around $288.29.
VEEV’s weak fundamentals are reflected in its POWR Ratings. It has a D grade for Value. Click here to see VEEV’s ratings for Growth, Momentum, Stability, Quality, and Sentiment. VEEV is ranked #26 of 80 stocks in the Medical – Services industry.
Okta, Inc. (OKTA)
OKTA delivers identity management platforms for enterprises, businesses, universities, and government agencies internationally. Its offerings include Okta Identity Cloud, which is a platform that offers a suite of products to manage and secure identities, and Single Sign-On, which enables users to access their applications in the cloud or on-premises from various devices with a single entry of their user credentials.
The company completed the acquisition of Auth0 on May 3, 2021. Auth0 is a leading identity platform for application teams that addresses a broad set of digital identity use cases and provides secure access. However, the acquisition could take a toll on OKTA’s already weak financials.
OKTA’s operating loss increased 73.7% year-over-year to $90.68 million for its fiscal first quarter, ended April 30. Its net loss grew 117% year-over-year to $203.22 million, while its operating expenses increased 107.3% year-over-year to $337.16 million. The company’s loss before income taxes increased 116.7% year-over-year to $203.47 million.
In terms of forward Price/Cash Flow, OKTA’s 1,090.57x is 4,808.1% higher than the 22.22x industry average. Its 59x forward Price-to-Book ratio is 901.7% higher than the 5.89x industry average. Analysts expect OKTA’s annual revenue to increase 45.6% year-over-year to $1.22 billion in 2022. However, its EPS is expected to remain negative in 2022 and 2023. The stock has declined 17.7% over the past month and has been recently trading at around $213.36.
It’s no surprise that OKTA has an overall D rating, which equates to Sell in our POWR Ratings system. The stock has a D grade for Growth, Value, Stability, and Sentiment. We’ve also rated OKTA for Quality and Momentum. Click here to see all of OKTA's ratings. OKTA is ranked #50 of 59 stocks in the D-rated Software – Business industry.
Want More Great Investing Ideas?
Disclaimer: Information is provided 'as-is' and solely for informational purposes, not for trading purposes or advice, and is delayed. To see all exchange delays and terms of use, please ...
more
Informative